5 signs you're getting out of debt too fast

Anyone who's trying to pay
down credit card debt wants to be debt-free as soon as possible. Yet while
racing to the finish line may save money in interest, some quick debt-repayment
scenarios may actually hurt consumers in the long run, experts warn.

"When you're in debt, you
just want to have it paid off so badly and you can't wait until you sign that
last check," says April Dykman, who writes about her ordeal paying off $27,000
in credit card debt and car loans on GetRichSlowly.org.
Paying off debt is like dieting and crash diets don't work, Dykman adds. "If you're going from spendthrift to tightwad
overnight, that's asking for failure."

1. You haven't planned for emergencies
With so many banks offering
less than 1 percent in interest on
savings accounts, some people say it's a better investment to use all their money to knock off more expensive credit card debt than hold funds for a rainy
day. While you may get out of debt
faster using that approach, you'll be reaching for your credit card again the
next time your car breaks down. "Life's
not going to wait for you to get your credit cards paid off before something
happens," says Marcia Brixey, author of "The
Money Therapist: A Woman's Guide to Creating a Healthy Financial Life."

While you may not want
$20,000 sitting in a savings account while you have $10,000 in credit card
debt, use some of your money to create a "baby emergency fund," says
Dykman. Having $500 or $1,000 socked
away will take care of minor emergencies so your debt repayment plan can stay
on track.

2. You're neglecting key areas of your life
While it's smart to scale
back on certain areas of your budget to put more money toward paying down debt,
some people either cut certain categories altogether or create unrealistic
spending plans that lead to problems in other areas of their lives.

"A realistic spending plan
has your house payment, utilities, transportation needs, food needs and some
clothing needs," says Mary Gresham, an Atlanta-based clinical psychologist who
specializes in money behavior. Not only that, but it incorporates socializing,
which allows you to maintain important relationships. "It doesn't have to be
excessive," says Gresham. "It could just
be enough money to rent a movie and have a friend over."

Life's
not going to wait for you to get your credit cards paid off before something
happens.

-- Marcia Brixey
Author

Some areas you may not want
to scale back on at all while paying off debt include health insurance and
retirement accounts, particularly a 401(k) plan that offers a company match.
Though you may pay your cards off faster by halting those 401(k) contributions,
"you're robbing your future," says Dykman.

3. You're feeling deprived or easily agitated
While a key to effective
money management is separating your needs from your wants, some people decide
that their needs are the only things they'll spend money on until they get
their debt under control. "It may work
for a while, but at some point you're going to say, 'enough of this' and go out
on a spending spree and spend way more money than you would if you hadn't been
depriving yourself," says Brixey. Even while cutting back, leave a little money
for small treats to keep life fun.

Deprivation also can
make you unhappy and easily frustrated, which can also derail your good
intentions. Dykman remembers getting upset over a broken $15 carafe because the
replacement cost would take away from her debt repayment plan. "That was
absolutely no way to live," she says. "It's important to pay off debt but
quality of life is important as well."

4. You're depending on the good financial habits of
others
Many people make a major dent
in their debt load thanks to the helping hand of a friend, spouse or other
relative. But despite the good intentions, a bailout can often be detrimental
to the one who's racked up the debt, says Gresham.

If somebody cleans up your
financial mess, you're not forced to change your behavior. As a result, you're
likely to run your credit cards up again "and not only that, but you now have
the wrath of the family member who bailed you out," Gresham says.

In the interest of keeping
the relationship from souring, if someone really wants to help you out, let
them pay for financial counseling instead, Gresham says.

5. You're not learning new financial habits
Though getting out of debt
can be a long and grueling process, there is some value in that. "I have
several patients who have taken four to eight years to turn things around; by
the time they're done, they're in pretty good shape in terms of budgeting and
planning and spending only cash," says Gresham.

If you're getting rid of the
debt by tapping into your home equity or 401(k) account, you're not learning
the habits that will help you stay debt-free, says Brixey. She learned that
lesson firsthand about 20 years ago when she and her husband used equity to
pay off their credit card debt and then promptly used the cards again.

Likewise, if you're simply
throwing money at the debt without forming a plan, you're merely reacting to
the debt rather than learning how to make better choices in the future. "You
didn't plan your spending in the first place, which is why you're having credit
card troubles, and you're not planning your payments so they are going to be
erratic instead of consistent over time," Gresham says.

The key to successful debt
repayment is not looking for the quick fix, but taking it one step at a time.
"It's a process of developing better spending habits," Dykman says.

Published: March 1, 2011

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